1.

What Is Insurance

Insurance is a mechanism by which the insured transfers his risk to the insurer by paying certain
amount of money in the form of premium.

Insurance is an economic device for reducing and eliminating risk through the process of combining a
sufficient number of homogeneous exposures into a group to make the losses predictable for the group
as a whole (From the social point of view)

Insurance is an economic device whereby the individual substitutes a small certain cost (the premium)
for a large uncertain financial loss (the contingency insured against) that would exist if it were not for
the insurance. (From an individual point of view)

It is a contract between one party called the insured and another party called the Insurer whereby in
consideration of payment of premium by the Insured the Insurer agrees to make good any financial loss
the insured may suffer due to operation of an Insured.

2. Functions of Insurance: Qu
es
A. Risk Transfer: tio

The major function of insurance is to serve as a risk transfer mechanism. Through insurance, the
insured can transfer the uncertainty of loss with certainly known and reasonable premium. Insurance
will not prevent the risks from happening but provides some form of financial compensation and what
one transfers to the insurer is the financial consequence of the risk. The main function of risk transfer
is done through common pool and equitable premium.

B. Creation of Common Pool

In the early days of insurance, merchants carrying marine insurance, who were having goods carried
on a ship would agree prior to voyage, to make contribution to those who suffered a loss during voyage.

The traditional burial society in Ethiopia (Edir) will enable us to share some burial expenses as
stipulated in its memorandum of associations. The above examples have drawbacks because every
member will contribute similar amounts irrespective of risks he has brought to the pool. Moreover,
under early marine adventures members knew their contribution after the loss. The insurance company
gathers together people who want insurance and sets itself to operate and manage the pool. It takes the
contribution in a form of premium from many people and pay for losses to the unfortunate few from
such fund. The pool idea works because not everyone in the pool will have a loss in any one year as
with the same magnitude and severity.

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 C. Equitable Premium:

There can be several of the pools, one each for main type. e.g. motor risks pool, fire risks pool,
employer’s liability, risks pool, etc. The insurer is faced with differing magnitude of hazard, and
differing value at risk.The insurer should charge what is known as equitable premium, i.e., contribution
made by each party should be fair to all parties participating. Each members of the pool will be
charged based on severity, frequency, value at risk and other factors such as competition.

3. Benefits of Insurance:

D. Peace of Mind:

The knowledge that insurance exists to meet financial consequences of certain risks provide a form of
peace of mind. One can directly deal on his business matters than thinking of possible likelihood of a
loss or event of loss occurring.

E. Loss Control:

Insurers do have an interest in reducing the frequency and severity of a loss, not only to enhance their
profitability but also to contribute to the general reduction in economic waste which follows from
losses. e.g. surveyors advise of pre loss control like flood control building.

F. Social Benefits:

Availability of insurance cover to recover from losses provide stimulus to the business activity. The
social benefit is that people keep jobs, their source of income are maintained and can continue to
contribute to the national economy. Major losses leading to a closing of a business can have adverse
impact on the community and to the economy as a whole.

G. Investment of funds:

There is a time gap between the receipt of premium and payment of claim. This vast sum of money
should not be kept idle. It is invested in a wide range of different forms of investment. By making
loans available for mortgages and other businesses, buying shares in the market, investing in bonds and
others, insurers have become major institutional investors in an economy.

H. Invisible earning:

Insurance like bank and tourism is invisible trade. A substantial amount of money is earned through
service export towards improving balance of trade. This substantial foreign exchange helps to a
positive balance of trade to an economy.

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4. Principles of Insurances

I. Utmost Good Faith

Each party must provide the other with truthful and sufficiently complete information to enable one
arrive at a decision. Both the insured & the insurer should be disclosed all relevant information
sufficiently and completely.

J. Insurable Interest

A financial relationship recognized at law between the insured and the subject matter of insurance.

Insurable interest constitutes the legal right to insure arising out of a financial relationship recognized at
law between the insured and the subject matter of insurance.

K. Indemnity

Exact financial compensation sufficient to place the insured in the same financial position after a loss as
he enjoyed immediately before it occurred, which is not intended to provide profit from misfortune.

The purpose of insurance in general is to provide to the insured compensation in money or money's
worth equal to the amount of the financial loss he might sustain if the insured event takes place.

If there is under-insured average shall be applied, means the insurer's share of any loss is =
Sum−insured
∗Loss
ValueatRisk - The insured bears the balance of Full Value
 Indemnity can not apply to Life insurance and Personal Accident Insurance policies. Because
human being cannot be measured in terms of money.

L. Proximate Cause
The immediate cause and not the remote one should be taken into consideration. Obviously, when a
loss does occur, it is essential to determine its cause or causes in order to decide whether or not the loss
is covered by the policy.

There are three types of perils related to a claim under an Insurance policy

1. Insured Perils: These are the perils mentioned in the policy as being insured e.g. Fire,
lightening, storm etc. in the case of a fire policy and burglary under a burglary policy.

2. Excepted Perils: These are the perils mentioned in the policy as being excepted perils or
excluded perils. Examples would be suicide under a personal accident policy, or spontaneous
combustion under a standard fire policy, Riot strike, flood etc. which may have been excluded
and discount in premium availed.

3. Uninsured Perils: These are perils which are not mentioned in the policy document, but
which are clearly outside the scope of cover, such as fire damage under a burglary policy and

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 death from natural causes under a personal accident policy, snow, smoke or water as perils may
not be mentioned in the policy.

Insurers are liable to pay claims arising out of losses caused by Insured Perils and not those losses
caused by excepted or Uninsured perils.

M. Subrogation Right
The right of the insurer to take over any recovery right the insured may have against third party.
Subrogation is the transfer of legal rights of the insured to recover, to the Insurer.
 Subrogation does not apply to non indemnity contracts such as personal accident and life
assurance.
 An insurer should not recover more than what it has paid out. In other words insurers must not
make any profit by exercising their subrogation right.

 Sources of subrogation right (Subrogation can arise in 4 ways)

1. Tort 3. Statute
2. Contract 4. Right arising out of the subject matter of insurance

N. Contribution
Incase two or more insurers give to the same insured and the same risk they will indemnify the loss
jointly according to their premium share or limit of liability
Contribution applies where the following conditions are met:
 Two or more polices of indemnity exist;
 The policies cover a common interest;
 The policies cover a common peril which gave rise to the loss;
 The polices cover a common subject matter;
 Each policy must be liable for the loss.

 Characteristics of Insurable Risks

Fortuitous – the happening of a loss must be fortuitous as far as the insured is concerned. For
example, he must not deliberately damage his own property. The frequency and severity of any risk
must be completely beyond the knowledge and control of the person being insured.

Financial Value – There must be some way of measuring the loss in financial terms. Insurance
doesn’t avoid the risk; it rather provides financial compensation of the loss to reinstate the insured
to his original position or financial status. Insurable Interest - The insured must be in a legal
relationship between the insured and the financial loss. This is to avoid people insuring the
property of others and then collecting insurance money should anything happen, through their own
machination.

Homogeneous Exposures - As the name implies Homogeneous Exposure means large number of
similar risks. Given sufficient number of exposures to similar risks, there will be enough
experience to forecast the expected extent of loss. This enables insurers to estimate the possible
actual loss (less guess estimate). It doesn’t mean, however, insurers do not always insure for large
homogeneous risks. Example: Some risks such as satellite insurance were started without having
large homogeneous risks.
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 Pure Risks – Insurance is primarily concerned with pure risks. If someone was allowed to insure
speculative risks this would bring little incentive for people to go for work and that is why we
usually don’t insure speculative risks. However, the pure risk consequences of speculative risks are
insurable. e.g. machinery loss of profit insurance.

Particular risks – As we have previously discussed, particular risks are not widespread and
uncontrollable unlike fundamental risks. The widespread and indiscriminate nature of fundamental
risks has resulted in them traditional being uninsurable. Insurers however, insure some and selected
natural fundamental risks based on their geographical location of the property. Fundamental risks,
which arise out of the nature of society, are not insurable including changing customs and inflation.

Public policy – It is common principle in law that contracts must not be contrary to what society
would consider right or moral thing to do, that is to say that contracts to any criminal venture are
not acceptable. For example, a company can’t insure a chauffeur in the event of convicted drink
driving offense committed by a person who is banned from driving.

5. Proposal Form:

The proposal form is the most common mechanism used by the insurer to seek answers to basic and
necessary facts from the proposer.

This Form represents the basis of the contract between the proposed insured and the insurer it is to be
completed by the proposed insured.

It is used for most classes of business. The exception is in marine insurance /a slip used/ and in fire
insurance /survey report & other means of assessing risk is required/

6. Policy Form:

A policy is an evidence of the contract of contract of insurance. The formation of insurance contract
follows the process of offer and acceptance. The insurance policy, as stipulated in Ethiopian
Commercial code of 1960 article shall show:

1. The place and date of contract;

2. The names and addresses of the parties;
3. The item, liability or person insured
4. The nature of risks insured;
5. The nature of risks insured;
6. The amount of the guarantee
7. The amount of the premium;
8. The term for which the contract is made.

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9. Heading

Heading of Insurance Policy usually describe the name and address of an insurance company and
sometimes the company’s logo, Telephone addresses-mail address, Fax number, Post Office Box, Web-
site, Logo of the company

7. Preamble (Recital clause) (Insuring Clause)

This clause is the preamble to the details of the cover, and it recites the circumstances in which the
policy will operate.

The operative clause is the heart of the policy.

It is a clause that describe the scope of cover in detail
It specifies what is covered and what is not covered

The preamble contains three main parts;

1. That the premium has been paid or there is an agreement that it will be paid.
2. That the proposal form is the basis of the contract and is incorporated in it.
3. That the insurer will provide cover stated in the policy

4. Operative Clause

This clause details the type of events insured against. That is it outlines the insured perils for which the
insured is indemnified.

8. Exception (Exclusions)

Clearly state what risks or perils are not covered at all, absolute exclusion, or perils covered by paying
additional premium. Exceptions are the inevitable consequences of insurance.

O. General Exceptions

General exceptions refer to those which are found in almost all policies such as:
 War  Typhoons
 Radioactive waste  Hurricanes and the like.
 Earth quake

P. Specific Exceptions

Particular exceptions refer to those which are peculiar to certain class of insurance or which is covered
by other insurance policies e.g.

 Riot in fire policy

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9. Conditions

Every insurance policy is subject to conditions, because even if none is specifically mentioned in the
document the law insists that certain implied conditions are always read into the contract. Conditions
may vary considerably between classes of business and between individual insurers, but their basic
intention may be summarized as follows

a) To remind the insured of the law provision (e.g. insured should take all reasonable steps to
avoid losses).
a) To restrict the cover provided (e.g. residence, occupation or war risks).
b) To grant privileges (e.g. the right of the insurer to take salvages having indemnified the insured)

Q. Implied Conditions:-
Implied conditions do not appear on the policy but are nevertheless important. In other words, implied
policies are found as legal provisions. Such conditions are implied by law to apply to all classes of
insurance. There are four conditions which are implied by law
 That the insured has an insurable interest in the subject matter insured.
 That both parties have observed the utmost good faith in their negotiations leading up to the
contract.
 That the subject matter of insurance is able to be identified.
 That the subject matter of insurance is actually in existence
 Express Conditions:-
These are the conditions expressed or stated in the policy. They vary from one class of business to
another and can be sub-divided into two as follows.

1. General Conditions:-

These are conditions to be fulfilled by the contracting parties in order to make the policy in force. Many
conditions are common to other policies but warranty is found mainly in marine and fire policies.

These usually deal with such matters as:-

 Reinforcement of a common law provision  Contribution with other reinsurers with the
such as misrepresentation and fraud. risk
 Alterations requiring to be notified to the  Subrogation
insurer  Arbitration
 Restrictions in cover  Cancellation provision for the benefit of the
 Claims procedures insurer.
 Privileges to either party e.g. the right of the
insurer to take possession of a fire damage
building.

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 2. Particular Conditions:-

These conditions relate to extensions of cover beyond that contained in the standard (printed) policy.
For instance the allied perils such as explosion, impact, water damage, storm, tempest & flood,
earthquake, subterranean fire covers can be given as an extension to standard fire policy.

Special warranties: A warranty in an insurance contract is an undertaking by the insured that

something shall or shall not be done, or that a certain state of fact exists or does not exist. Compliance
with the warranty is, in law, fundamental to the liability of the insurer. The only time when a breach of
warranty does not affect the liability of the insurer in practice, is when the breach was totally
immaterial to the loss which took place. Warranties are imposed usually for the following reasons

 To ensure that some aspect of good housekeeping or good management is observed. e.g. in theft
insurance that an intruder alarm system is kept in good order under a contract of maintenance.

 To ensure that certain features of high risk are not introduced without the insurers knowledge, since
the premium charged has been based on the fact that they are not present. An example of this would
be where no oils were stored and therefore not charged for in fire insurance, it would be warranted
that no oils are kept.

 Normally warranties must be written or expressed conditions of the contract but, in marine
insurance there are implied warranties or undertakings that the vessel is seaworthy and that the
adventure is lawful.

 The schedule

This document personalizes the policy booklet with the policyholder’s details, those of the specifically
insured vehicle, the applicable cover and excesses any ‘endorsements’ applicable to the policy. A new
schedule is issued for mid-term policy changes and often at renewal.

10.The certificate of motor insurance

Apart from the serving the purpose of providing evidence of RTA insurance to comply with legislation,
some of the detail on the certificate unique to the individual policy is incorporated in the policy
limitations and exclusions, including the registration number of the insured vehicle and the permitted
drivers and use.

11.The statement of facts

Also referred to as a Confirmation of Policy Details or proposal form, showing the information
provided by the proposer/policyholder, on which the assessment of the risk is based

12.Endorsements

Endorsements’ are wordings which vary the main policy wording or other changes
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13. Warranty

A warranty: is a statement of fact or a promise made by the insured, which is part of the insurance
contract and which must be true is to be liable under the contract. A warranty is a clause in an insurance
contract holding that before the insurer is liable, a cretin fact, condition or circumstance affecting the
risk must exist.

For example, an insurance policy covering a ship may state, “Warranted free of capture or seizure”, this
statement means that if the ship is involved in a war skirmish, the insurance is void. Alternatively, a
bank may be insured on condition that a certain burglar alarm system be installed and maintained. The
clause describing the warranty becomes part of the contract. Such a clause is a condition of coverage
and acts as a warranty.

Warranties are conditions that provide breach of which permits the insurers to avoid their policy (if
there has been an increase in risk).

Special warranties: A warranty in an insurance contract is an undertaking by the insured that

something shall or shall not be done, or that a certain state of fact exists or does not exist.

14. Cover Note

 The Temporary Cover Note: Is issued by the insurer to the insured if the insured not fill
available information in the proposal form. or
 When the customer wants instant cover and when it is not possible to issue permanent certificate
of insurance the temporary certificate or simply cover note is issued. The cover note provides
the policyholder with the main details of the cover granted whilst awaiting the permanent
documents including the policy. It also acts as a temporary certificate.
 Cover Notes have the same legal status as the policy. It is normal to restrict the effective period
of cover note to 15 or 30 days (3-4 weeks)

15. Certificate of Insurance:-

In circumstances when insurance cover is compulsory by law it is usual for a certificate of insurance to
be required by legislation.

 In motor insurance for instance the certificate must show:-

 The registration mark of the vehicle or the description of the type of vehicles insured.
 The name of the policyholder
 Policy number
 the inception date of the cover
 the expiry date of the cover
 the persons or classes of persons entitled to drive
 The limitation as to use of the vehicle.
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E.g. normal private car certificate would exclude commercial traveling

16. The Schedule:-

The schedule is part of the policy which records the details of the particular contract. The information
which is found in the schedule mostly includes the following:-

 Insured's name
 Insured's address
 Insured's profession, business or occupation
 Period of insurance
 Premium
 Policy number
 Sum insured, or limit of indemnity
 Description of the subject matter
 Any particular warranties applied to that policy

17. Signature or Attestation Clause:-

This makes provision for the insured to affirm the conditions of the contract as set out in the policy. The
policy document is prepared by the company and is signed on behalf of the company. Normally a senior
official at the Branch issuing the policy will countersign or initial the policy as evidence of the
company's undertaking to honor both the printed and type written parts of the document.

18. Endorsements:-

Is a statement which shown only the change, attention,**** additional

From time to time it is necessary to make alterations in the wording of a policy to take note of the
charges in sums insured, substitution of one item for another etc. It would be costly and time-
consuming to issue a new policy each time, so a sheet of paper called an "endorsement slip" is issued
noting the alterations and any additional or return premiums involved.

19. Named Policy & All Risk Policy

• Specified/Named perils policy - losses from any other source than an insured peril are
simply uninsured.
• ‘All risks’ policies – any peril which is not specifically excluded is automatically an insured
peril and there is no third class of insured perils

• RISK:

 The possibility of unfortunate occurrence

 Is a combination of hazards

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  Unpredictability – the tendency that the actual result may differ from predicted results
 Chance of bad consequences, loss or uncertainty
 The possibility of loss

R. Classification of Risks

S. Pure V/s. Speculative Risk

Pure Risks: in contrast, are used to designate those situations that involve only the chance of loss or no
loss. They involve a loss or at best a breakeven situation. The outcome can only be unfavorable to us or
leave us in the same position as we enjoyed before the event occurred.

Speculative Risks: describe a situation in which there is a possibility of loss or gain. Investment is a
good example. The investment may result in a loss, or possibly a break-even position but the reason it
was made was the prospect of gain

3. Dynamic V/s. Static Risk

Dynamic Risks: are those resulting from changes in the economy, politics and social situations that
includes, changes in the price level, consumer test, income & output and technology which may cause
financial losses.

Static Risks: involve those losses that would occur even if there were no changes in situations. Static
losses tend to occur with a degree of regularity overtime & as a result are generally predictable.

4. Fundamental V/s. Particular Risk

Specify the Insurable Risks & Non Insurable Risks

Fundamental Risks: involve losses that are impersonal in origin and consequences. They are group
risks caused for the most part by economic social and political phenomenon. They are risks that affect
the whole society.

Particular Risks: involve losses that are out of individual events and are felt by individuals rather than
by the entire group. These are risks that affect particular individual/s.

5. Financial V/s. Non-Financial Risk

Financial Risks: are the one where the outcome can be measured in monetary terms.
Non-Financial Risks: Risks which do not have financial consequences are called non financial risks.
In the above definitions the underlying ideas fall into three categories:
1) Uncertainty: Risk implies uncertainty about unfortunate outcome unlike chance which implies an
outcome which if favorable. If we are sure that the unfortunate will happen, then it is not a risk exists
whether we recognize it or not. It should be outside the control of individual involved. Further, it refers
to present and future events that are uncertain.
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2) Frequency and Severity: Even if we know there is a high probability of materialization of risk, we
don’t know how frequent and how severe it could be. Some risks such as shoplifting are frequent but
less severe. Accidents involving ships and planes are less frequent but too severe.
3) Peril and hazard: Cause of eventual loss is one of the components of risk. Peril is a prime cause
that gives rise to a loss and is usually beyond the control of any one who may be involved. Hazard is
not by itself a cause but it can increase or decrease the effect should a peril operate. An example of
peril could be fire and an example of hazard could be the type of construction material such as thatched
roof.Hazard could be physical or moral. Physical hazard refers to the physical or tangible aspects of
risk which are likely to influence the occurrence and/or severity of loss e.g. type of construction in fire
risk.
Moral hazard is concerned with the attitudes and conduct of people. This is primarily the conduct of
the person insured. Examples of moral hazard include carelessness, dishonesty of insured and an
insured who considers claims as kind of investment.

20. Peril

There are three basic types of peril:

Insured perils: These are plainly understood, such as fire under a fire policy and burglary under a
burglary policy.

Excepted perils: These are perils which are specifically excluded from the insurance cover, either
because it is not practicable to insure them at all or because they cannot be insured at the premium
applicable to the policy. Examples would be suicide under a personal accident policy, or spontaneous
combustion under a standard fire policy.

Uninsured perils: These are perils which are not mentioned in the policy document, but which are
clearly outside the scope of cover, such as fire damage under a burglary policy and death from natural
causes under a personal accident policy.

21. Risk management

Risk management is defined as a systematic process for the identification and evaluation of pure loss
exposures faced by an organization or individual, and for the selection and implementation of the most
appropriate techniques for treating such exposures. It is a scientific approach to dealing with pure risks
by anticipating possible accidental losses, designing, and implementing procedures that minimize the
occurrence of loss or the financial impact of the losses that do occur.

22. Objectives of risk Management

The first step in the risk management process is the determination of the objectives of the risk
management program that is, deciding precisely what it is that the organization expects its risk
management programs to do.

Risk management has several important objectives that can be classified into two categories: pre loss
objectives and post loss objectives
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Pre loss Objectives Post loss Objectives

Economy Survival

Reduction in anxiety Continuity of operations

Meeting external obligations Earnings stability

Continued Growth

Social responsibility

T. Private Vehicles:

A vehicle is classified as private vehicle if it is used solely

23. Motor Insurance for social, domestic, pleasure and professional purposes or
business calls of the insured. The term private use does not
Definition: A motor vehicle include use in connection with the motor trade, racing,
means a mechanically propelled commercial traveling and hire and reward.
vehicle intended or adapted for
use on roads. U. Commercial Vehicles:

Subject matter of Insurance:

6. Goods Carrying Vehicles:
The subject matter in motor
insurance is motor vehicle. A
motor vehicle is defined by It ranges from trucks to small goods carrying delivery
Road Traffic Act of the UK as a vans. Such vehicles can be used for the carriage of: -
mechanically propelled vehicle
intended or adapted for use on  Owner's own goods
roads. Road means any  Goods for hire or reward /general cartage/
highway and any other road to  Goods plus carriage for hire and reward.
which the public has access and  Passenger Carrying Vehicles:
includes bridges over which a
road passes. Includes: taxis, minibuses, buses, etc. used for the carriage of
passengers. generally, it is divided into
24. Classification of Motor
Vehicles: Public Service Vehicles:

Motor vehicles are classified in Public service vehicles are vehicles used for the carriage of
accordance with their use and passengers for hire or reward. These include:
type as follows
 public hire vehicles(taxis)
 private hire vehicles(car hire)
 buses

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 Own Service
Vehicles:

 Own service
vehicles are
passengers carrying
vehicles used for the
carriage of owner's
employees for
service.
 The seating capacity
could be less than
twelve.
 Vehicles of Special
Construction:

Such vehicles are

designed or constructed
to perform specific
purposes such as

 Ambulances,
 Fire Trucks
 Mobile Cranes,
 Ready-mixed
Concrete
Carriers,
 Breakdown
Vehicles,
 Site Clearing
and Leveling
Plants such as
Dumpers,
Excavators,
Dozers and
Graders, etc…

7. Agricultural and Forestry Vehicles:

This group includes tractors, trailers, balers and combines harvesters. Such vehicle will not
normally be used a great deal on the road.

8. Motor Cycles:

This group is two or three wheeled vehicles used for personal or business purposes.

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  We issue private motor policy for the private motor cycles and commercial motor
policy for commercial motor cycles.
 Motor Trade:

This class of risk relates to vehicles used by dealers and repairers in during drive test, in
custody and other related activities in motor trade.

We issue Motor Trade policies which can be:

9. Road Risks Policy

7.1 Internal Risks Policy

7.2 Or Combined Road and Garage Policy

10. Learners:

They could be double clutch and brake pedals used for training drivers. We issue commercial
motor policy with enhanced excesses by limiting the additional benefits.

25. Types of Motor Policies

There are four types of covers are provided under motor insurance policies: in an increasing order :
1. Compulsory third party Motor insurance (Third party risks proclamation 779 / 2013 (RTA)
2. Third Party Only (TPO)
3. Third Party Fire and Theft Cover
4. Comprehensive Cover

26. Compulsory Third Party Motor insurance Cover ፡

 This is the minimum cover provided by motor insurers which is sufficient to comply with the
minimum insurance requirements of Ethiopia (i.e. Proclamation no. 559/2008 ) as amended by
779/2013
 this type of cover indemnifies the insured against compulsory legal liability for death of or
bodily injury to third parties and damage to third party property caused by lawful use of the
insured vehicle
 Cover will apply to incidents which occur on a road as defined in the Proclamation.

 Basic compulsory policy cover/compensation:

• Emergency Medical Treatment up to Birr 2,000 per person (in addition to third party victims all
other victims of motor vehicle accident are also eligible for this benefit.)
• Medical Expense up to Birr 40,000.00
• Bodily injury up to Birr 40,000.00
• Death Compensation not less than Birr 5,000 but not exceeding Birr 40,000 per person
• Property damage :

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 • Third party property damage compensation up to Birr 100,000 per event for both private and
commercial motor vehicles
• Legal costs incurred in defending an action for damage
• Most of the policy exclusions and conditions not operational, but insurers have subrogation
right against policyholder /driver.
• This cover is usually provided where it is discovered that the policy holder has a poor accident
or conviction record.

• Exclusions for Compulsory Third Party Motor Insurance:

 Death or Bodily Injury

1. Arising out of and in the course of employment by the insured.
2. The insured and immediate families of the insured
 Loss of or damage to the:
3. Insured vehicle
4. Goods being carried
5. Goods in the user's custody or control
6. Any contractual liability.

27. Third party only (TPO) covers

 This cover will extend the third party liability cover to any situation involving a motor vehicle
with in the territorial limit
 .Under TPO policies ,off the road cover is also provided
 TPO cover on private policies has a well known extension which enables the policy holder to
drive a vehicle not belonging to them and be covered for third party risks. This is commonly
known as the driving other cars’ extension.
 The extension applies when the insured vehicle is disabled and not road worthy.
 The wording is as follows :
The policy holder may also drive a motor car or motorcycle, not belonging to him and not hired to him
under a hire purchase agreement

28. Third Party Fire and Theft Cover (TPF &T)

 This policy extends a third party cover to incorporate elements of cover that relate to the policy
holder’s own vehicle
 Such a policy will provide indemnity for loss of or damage to the insured’s vehicle and
(accessories and spare part) caused by fire or theft or attempted theft.
 Nowadays ,most private car policies will provide fire and theft cover in relation to accessories
and spare parts irrespective of whether they are fitted to the vehicle ,but these must normally be
located with the policyholder’s private garage ,if not attached
 Under the motor cycle policy, theft of such accessories or spare part will not be covered unless
the vehicle is stolen at the same time.
 Accessories and spare parts are specifically for your car and not other car which are in or
on your car or in your private garage at the time of the loss or damage

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 V. Theft:
 Theft according to the law must include the intention of permanently depriving but theft within
the context of motor insurance policies is generally given a wider interpretation.
 For the purposes of indemnity under the theft section of a policy ,cover is given in respect of
loss or damage caused by unauthorized use of the vehicle (e.g. joy riding)
 Damage to a vehicle that is stolen and subsequently recovered in a damage state is covered
under the theft section of the motor policy
 Theft claims are subject to a waiting period of six to twelve weeks.(6-12 )Weak
 What is the justification for the waiting period?

W. Fire:
 External fire and fire resulted from wear and tear, mechanical or electrical failures or
breakdown will be covered under this section.
 Proximate cause of fire damage is excluded
 Resultant effects of internal fire is covered

29. Comprehensive Ins. Cover (Perils Covered in Own Damage)

A. For loss of or damage to the insured vehicle by:

1. Accidental collision or overturning
2. Fire, external explosion, self-ignition, lightening,
3. Theft or attempted theft
4. Malicious act
5. Impact damage caused by falling objects
6. Whilst in Transit by: road ,rail, inland waterway, lift or elevator

B. To the insured against legal liability for death of or bodily injury to third parties and damage to third
party property caused by lawful use of the insured vehicle

30. Motor Comprehensive Additional Cover/Extension

 Increase in third party liability limit;

 Territorial limit extension;
 Special cover (B.S.G);
 Passengers legal liability (P.L.Ll)
 The special cover (B.S.G) shall be provided as part of the standard cover without additional
charge in respect of private vehicles.

 Territorial extension

Cover under a Motor policy can be extended beyond the boundaries (Territorial Limits) of Ethiopia
1) Loss or damage to the insured vehicle,
a. For COMESA yellow card member countries:
b. For Non-COMESA yellow card member countries
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2) Legal liability towards third parties,
a) For COMESA yellow card member countries :
b) For Non-COMESA yellow card member countries

31. Yellow Card Scheme Cover:

 Yellow card scheme has been setup to assist Motorists Visiting or transiting through countries
that are signatory to the scheme.
 The COMESA Yellow card Scheme participating Countries at the moment are:-
Burundi, Eritrea, Ethiopia, Kenya, Malawi, Rwanda, DR. Congo, Tanzania, Uganda,
Zambia, Zimbabwe, Sudan and Djibouti`
 COMESA Yellow Card is issued as a valid certificate of insurance and an evidence of guarantee
whenever the primary policy extended beyond the territorial limits to provide the compulsory
minimum insurance cover required by the law of the COMESA country in which an accident
occurs in respect of a vehicle from another COMESA country.
 The signatories to the scheme agreed to extend the primary policy beyond the territorial limits
to provide minimum third party cover for death or injury or damage to property to comply with
the law of the county visited or transited through.
 The Card is uniform in appearance throughout the COMESA so that it can be readily
identified and accepted as a certificate of insurance at border lines/posts/.
 Each card bears a serial number which is coded for each country case by case in which the
Yellow Card was issued.
 Extra Benefits under yellow Cards Scheme i.e. medical expenses shall be covered up to the limit
set by the pool in respect of the following vehicles.
 Under private car motor Policy: - the insured, his driver and any occupant but not exceeding
the maximum seating capacity limited by law are covered.
 Under Commercial Vehicle Policy: - The driver, his assistant and up to two any other persons,
whose jobs are directly connected to the operations of the insured vehicles are covered.
 Public Service Vehicle; - Any passenger other than those covered under Commercial Vehicles
policy above are covered.
 Motor Cycle: - The motor Cyclist, his Passenger and any other passenger carried in the side car
are covered subject to all passengers wearing the crash helmets and provided the number of
passengers does not exceed the maximum seating capacity limited by law.
 Yellow Card insurance shall in no way be provided without having the required motor
Insurance.
 No extension of covers shall be allowed beyond 12 months or the expiry date of the policy.


 Exclusions for Own Damage

1. Any excess amounts stated in the schedule; Excess can be:

• Standard excess
• Young and inexperienced driver excess
• Voluntary excess
2. Loss of use
3. Wear and tear, depreciation, mechanical or electrical, electronic or computer failures or
breakdown.
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 4. Mechanical or electrical, electronic or computer break-down or failure of any part of any motor
vehicle described in the schedule;
5. Damage to tyres by braking, punctures, cuts or bursts;
6. Loss of or damage to any communication equipment of any kind;
7. Any reduction in the market value of the insured motor vehicle following any repair whether or
not as a result of any claim under the policy; and
8. Loss of or damage in respect of any radio, record player, tape recorder, canvas ropes, unless
specifically declared and insured;
9. Depreciation, wear and tear, mechanical or electrical, electronic or computer failures or
breakdown.
10. Loss or damage as a result of deliberate act by the insured person.

11. General Exceptions

(Applicable to all section)

The Corporation will not be liable to make any payment in respect of:-
1. Any accident, loss, damage or liability caused, sustained or incurred;
a. Outside the territorial limit of ethiopia;
b. Race making speed testing and test driving
c. Whilst the driver is under the influence of intoxicating liquor or drug.
2. Any contractual liability;
3. Driving the car without driving license or holding dis-qualified license.
4. Flood, typhoon hurricane windstorm volcanic eruption earthquake or other convulsion of nature.
5. Accident sustained due to war, invasion, act of foreign enemy, hostilities or warlike operations,
whether war is declared or not, civil war, riot, strikes
6. Loss of or damage to the insured motor vehicle or any form of liability whilst the insured motor
vehicle is towing any trailer not specifically insured under this policy or any disabled mechanically
propelled motor vehicle.
7. Overloading or strain
8.
a. Ionizing radiations or contamination by radio activity from any nuclear fuel or from any
nuclear waste from the combustion of nuclear fuel:
b. The radioactive, toxic, explosive or other hazards properties of any explosive nuclear
assembly or nuclear component.
9. Death or bodily injury or damage to property or damage to the insured motor vehicle caused by or
arising out of the explosion of a boiler forming part of or attached to or on the insured motor
vehicle described in the schedule of the policy.

a) Loss or damage as the result of deliberate act by the insured person

b) Any reduction in the market value of the insured vehicles following any repair whether as a
result of any claim or other reason
c) The policy does not cover theft arising if ignition key is left in or on the car

Loss of, or damage to the insured car as a result of it being stolen or taken without your
permission at any time if:
 An ignition key or any similar device is left in or on the car; and/or

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  All doors ,roof, windows and all other openings including convertible roofs have not been
closed and locked;
 Any security or tracking device, which you have told us is fitted to your car ,has not been set or
is not set in working order and/or the amount of annual network subscription for the
maintenance contract of any tracking device has not been renewed

32. Suspension of Cover for lay-up

The vehicle is said to be laid up when it is out of use, otherwise than as a result of damage or loss
covered by the policy. Upon receipt of a written notice that the vehicle is to be laid-up, the cover shall
be suspended either fully or partially.
Partial Suspension: - If the policy is suspended and gave cover only in respect of fire and
theft risks, the policy shall be extended by a term equal to 75% of the suspended period
provided that the balance of premium for the remaining period of cover is adequate for the
period of extension for fire and theft on pro-rata basis.
Total Suspension:- When an insured does not require fire and theft risks to be covered the
policy shall be totally suspended during the said period and extended for an equivalent period
only after expiry.
To qualify for suspension of cover for lay –up:
• Notice should be given in writing to the insurer.
• Certificate of motor insurance (if any) must be returned to the insurer.
• The vehicle must be laid up off the road for at least 4 and 12 consecutive week for
private and commercial Vehicles.
• The vehicle is not out of use due to damage or for which a claim has been made under
this policy.
• Provided the above three conditions are fulfilled the policy will be extended for the same
number of weeks.
• Suspension of cover for layup is not applicable for agriculture and car hire vehicles

33. Motor Underwriting Information

For underwriting purposes motor vehicles shall have

• Plate No. • Make & Model,
• Engine No., • Year of Make
• Chassis No., • Sum Insured or Value

34. Underwriting documents

X. Mandatory
 Title Certificate for private individuals,
 Pre-acceptance Survey Report,
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  Proposal form for private individuals,
 Official letter for organizations which has more than 2 vehicles,
 Customs Declaration for Duty-free Vehicles

Y. Optional
 NCD Certificate if the proposer had previous insurance,
 Power of attorney if the proposer has assigned somebody,
 Marriage Certificate if the staff requested cover

35. Discounts

 More Than One Vehicle Insured (Fleet Discount).

 Staff discount
 No Claim Discount (NCD)
 Insured Only Driving 10%
 Loss Experience Discount
 Special discount

36. No Claim discounts (NCD)

 NCD is a discount given to an insured in consideration of his satisfactory claim experience in

the preceding year (s) of insurance.
 No claim discount shall be calculated on the renewal premium in respect of each vehicle:
 which has been insured for a period of one year and over; and
 where no claim has been made or pending during the period of insurance or consecutive periods
of insurance

37. Some rules for NCD

 If only one claim is made during the period of insurance, any no claim discount which was
allowed at the last renewal shall be reduced by two years for every claim made.

 If more than one claim is made during the period of insurance, any no claim discount earned
shall be reduced to Nil.

 When more than one vehicle has been covered under one policy, NCD applies separately to
each vehicle i.e., each vehicle earns NCD according to its claims history.

 When a vehicle with the same insured substitutes the existing vehicle which had a NCD, the
NCD is applicable to the new vehicle

 NCD benefit expires one year from the expiry date of the policy.

 If more than one claim is made during the period of insurance, any NCD earned shall be
reduced to nil.

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  NCD can be transferred from one insurer to another. Hence when the proposer produces
certificate from his previous insurer stating the period of insurance and confirming that no claim
was lodged,
 NCD shall follow the fortune of the insured (original) person and not the policy or the vehicle
and in the event of the transfer of the vehicle to another person, the NCD not to be transferred to
the new owner.
 NCD shall be allowed where the insured is not to be blamed of an accident by the police report
or court decision.
 When an insured with NCD changes his policy cover from comprehensive to a third party fire
and theft or third party only cover not vice versa, the NCD shall be adjusted according to the
new cover to the rate of discount for the preceding accident free period.
 NCD Certificate shall only be issued on clearance of any outstanding debts due.
 NCD is not applicable for flat rated policies

38. Deductibles

 Young and Inexperienced Driver’s Excess

 Voluntary Excess (Comprehensive Cover)
 Compulsory Deductibles/ Compulsory Excess (Comprehensive Cover)
 Third Party-no excess

39. Loadings

 Loading according to the loss experience

 Age Loadings (Comprehensive and Third Party Fire & Theft Cover)
 Duty free Vehicles (Comprehensive and Third Party Fire & Theft Cover)

40. Short-Term Rates

Short Period Rate is scale of premium applied to policy issued for a period of less than a year.

41. Pro-rata Rate

Pro-rata rate is a scale of premium charged proportionally of the annual premium to the respective
period of insurance. Pro-rata premium shall be applied under the following circumstances:
 When a vehicle is included to or excluded from an existing policy;
 When a policy is extended to bring the expiry date in line with other policies of the insured;
 When a policy is cancelled due to the fact that the insured is leaving for good from the country
and/or sells his car;
 When an insured vehicle is out of use (total loss) due to an excepted peril in the policy; and
 When the insurer cancel the policy before its natural expiry date.

42. Cancellation

If insured requests to cancel his policy before its expiry date apply short period rates provided no claim
has arisen during the current period of insurance. If there is any claim, there shall be no premium
refund
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General Provisions

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43. Claims

What is a Claim?
• A Claim is a request for reimbursement (or compensation) by the insured and addressed to the
insurer.
• A claim can be made (i.e. notified) without an insured loss event is happening. In such a case,
the claim would be invalid.

44. What is a loss?

◦ A loss is the occurrence of an insured event, such as an overturning of the insured motor
vehicle which results in financial disadvantage for the insured.
◦ It is the time where the values of the cover and the claims service is put in to test.
◦ Motor insurance, particularly private motor, is sold largely by price nonetheless a bad
experience of claims handling can affect the decision of insured’s whether or not to
renew with their current insurer.

45. The roles of the claim department are to:

 Provide a swift, efficient and technically knowledgeable claims service

 Indemnify the policyholder in accordance with the cover purchased
 Ensure that only valid claims are paid
 Consider and if appropriate, deal with third party claims whilst protecting the
policyholder's interest
 Protect the fund of premiums against overpayment, fraud and expenses incurred due to
inefficient claims - handling processes.

46. Method of Compensation

The insurer will either:

a. Repair the damage or
b. Replace what is lost or is damaged beyond economic repair or
c. Pay in cash for the amount of loss or damage
 Only the insurer has the right to choose which of the above three options to restore the policyholder
to the same financial position
 The maximum the insurer will pay is the market value of the vehicle at the time of the loss or
damage or the Sum Insured, which is the lesser.

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 Market value: is the amount that it would cost to replace a vehicle with one of similar make,
model, condition and mileage.
 Repair cost must be less than or equal to the Sum Insured or the estimated Market value whichever
is the lesser Less the estimated salvage value
 Repair cost < = SI/MV - estimated salvage value
 An insurer will often pay the pre-accident value for total losses and will sometimes pay cash in lieu
of repair.
 The cash payment option is not particularly popular with insurers especially if there is mechanical
damage: there is a fear that policyholder will retain the money, and not arrange for the vehicle to be
repaired.

 Protection and removal after accident

 Towing Expense:
 Where the insured vehicle is disabled by the loss or damage covered under the policy,
the insurer will also pay the reasonable cost of protection and towing expense up to
20% of the repair cost.

47. Claim Common documents

 Notification of Motor Accident Form

 Copy of the Driving License
 Motor Accident Inspection Report
 Traffic Police and/or other similar report

48. Repairable

In the case of repairable vehicles (additional documents required)

 Survey Reports
o Damage assessment
o Pre accident value
o Salvage value
 Garage repair estimates

49. Total loss

 Power of Attorney
 Customs Declaration in respect of Duty free
 vehicles
 Inland Revenue and Road Transport authority
 clearance certificates
 Discharge Receipt from the beneficiary

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50. Ex-gratia Claims Payments

Claims could be entertained on ex-gratia basis subject to the fulfillment of the following conditions.
Normally, ex-gratia payments should be made:
 where the exclusion is a borderline one;
 where there is a genuine oversight by the insured;
 to avoid contesting liability in courts; and
 to preserve good business relationship with the client

The amount payable shall not be the full amount of claim and the client shall share a certain amount of
the claim (a lesser percentage) for it is payment out of contractual obligation.

Claims involving reinsurance or co-insurance shall not be entertained on ex-gratia basis unless notified to
and approved by the Process Owner/ CEO.

Any recovery obtained from salvage disposal shall be proportionately apportioned between EIC and the
insured in line with the loss amount borne

51. Excess:

• The first part of a claim amount which should be borne by the insured.
• The terms of an excess clause give the insurer relief from liability to pay a specified first part of
an amount otherwise payable under a policy.
• An excess amount must be practical and beneficial to both insurer and insured.

Z. The purposes of the excess are as follows:

• To make the insured his own insurer for the specified amount of the excess thus perhaps
encourages greater care or prudence on his part.
• To relieve the insurer from the necessity to deal with the smaller losses ,many of which
will not even be notified to the insurer with resultant reduction in administration costs
• An important use of an excess is to counter unsatisfactory underwriting features.

52. Type of Excess፡

Compulsory excess – is an excess amount which is imposed by insurers. A compulsory excess

generally, may not be deleted be case it affects the rating .these are:
• Standard excess
• Young and inexperienced driver excess
• Fire and theft excess
• Breakage of glass excess
Voluntary excess –is an excess which is voluntarily accepted by the insured over and above
the compulsory excess to obtain discount in premium.
Young and inexperienced driver’s excess

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53. Franchise

 The difference between an excess and a franchise is that where an excess is imposed, the
amount of the excess is always deducted from the agreed amount of the claim whereas with a
franchise when the amount of the franchise is exceeded, the agreed amount of the claim is paid
in full.

 Use of franchise has potential problems :

• Where a repair estimate is only slightly below the franchise ,the insured may wish to
employ another firm (garage )at a higher price to bring the claim over the franchise limit
and receive full payment

• Insured’s may delay effecting repairs until costs have increased (due to inflation) thus
bringing the claim above the franchise amount.

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Motor Trade Insurance _ Loss and damage
 Motor trade insurances policies can be:
◦ Road risks Insurance policy.
◦ Internal or premises risks insurance policy.
◦ Or comprehensive road and garage risks insurance policy
Cover can be provided on:
Trade Plate Number basis:
 Any motor vehicle, the property of the insured or in his custody or control carrying in the
specified plate number as specified by law.
Named Driver Basis:
 Any motor vehicle, the property of the insured or in his custody or control being driven by
(name) or in his charge for the purpose of being driven by him.
 Internal Risks Policies:
◦ Such policies provide indemnity to motor traders for losses and liabilities that arise from
accidents at the motor trader`s premises.
◦ Cover can be Third Party only or Third party and Damage cover.
 Third party only cover- provides indemnity in respect of :
◦ Liability for accidental death or bodily injury to any person other than a person who at
the time of sustaining such injury is engaged in the service of the insured.
◦ Liability for accidental damage (other than by fire and / or explosion) to property other
than property belonging to or held in trust by or in the custody or control of the insured.
◦ Accidental damage(other than by fire and/or explosion)to any motor vehicles held in
trust by or in the custody or control of the insured other than a motor vehicle belonging
to the insured or a member of the insured`s family or any employee of the insured
 Internal Risks Policies:
◦ Such policies provide indemnity to motor traders for losses and liabilities that arise from
accidents at the motor trader`s premises.
◦ Cover can be Third Party only or Third party and Damage cover.
 Third party only cover- provides indemnity in respect of :
◦ Liability for accidental death or bodily injury to any person other than a person who at
the time of sustaining such injury is engaged in the service of the insured.

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 ◦ Liability for accidental damage (other than by fire and / or explosion) to property other
than property belonging to or held in trust by or in the custody or control of the insured.
◦ Accidental damage(other than by fire and/or explosion)to any motor vehicles held in
trust by or in the custody or control of the insured other than a motor vehicle belonging
to the insured or a member of the insured`s family or any employee of the insured
Third Party and Damage Cover:
 In addition to the above, it covers loss or damage to the insured`s own vehicles normally subject
to an excess in respect of each and every accident.
 Both policies will exclude loss, damage or liability resulting from fire, explosion, or theft
weather condition.
Combined Road and Garage Policies:
 This policy tends to be more than just a combination of the road risks and internal risks policies.
 It provides cover for loss or damage to property:
 Belonging to the insured
 In the insured`s custody or control for which the insured may be responsible
 This policy provides cover in respect of theft of vehicles from the insured`s own premises
excluding theft or dishonesty by:
 Employees
 Partners directors
 Vehicles in the insured`s custody or control are covered whilst they are:
 On the road
 Garaged away from their own normal business premise
 Garaged in the insured own normal business premises

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Workemen’s Componsation

2.4 WORKMENS COMPENSATION

2.6.1 SETTLEMENT OF CLAIMS:

Computation of Temporary Total Disablement Claim.

The wording of “100% of the 1 st Birr 250 of wages per month plus 75% of additional
monthly wages in excess of the 1st Birr 250 but not exceeding Birr 1500 per month for up to
52 weeks” shall be understood and interpreted as worked out in the following example.

Sick leave .............30 days Monthly salary Birr 2,000.-

T.T.D payment
100% of the 1 st Birr 250.- Birr 250.00

75% of the additional income in

Excess of Birr 250.-(Birr 2000.

Less Birr 250 - = Birr 1,750.-

75% Birr 1,750.- ) Birr 1,312.50

The Correct T.T.D payable Birr 1,562.50

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